Loan Policies and Operations; Interest Rates and Charges

FARM CREDIT ADMINISTRATION

12 CFR Part 614

RIN 3052-AB81

Loan Policies and Operations; Interest Rates and Charges

AGENCY: Farm Credit Administration.

ACTION: Direct final rule with opportunity for comment.

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SUMMARY: The Farm Credit Administration (FCA), through the FCA Board

(Board), issues a direct final rule amending its regulations concerning

interest rates and charges. This action is consistent with the FCA's

continuing efforts to reduce regulatory burden and unnecessary prior

approval requirements whenever possible. The amendments eliminate the

prior approval requirement for changes in interest rate policies at

banks for cooperatives (BCs), eliminate unnecessary or duplicative

regulatory requirements, clarify existing requirements that are

retained.

The effect of the amendments is to enable BCs to revise rate

policies for discounting negotiable paper without prior FCA approval,

to eliminate the requirement that fees charged by an association are

subject to bank approval, and to clarify that, in all Farm Credit

System (FCS or System) banks and direct lender institutions, the board

of directors is responsible for setting interest rates and annually

reviewing interest rate plans in conjunction with the review and

approval of the institution's annual business plan.

DATES: If no significant adverse comment is received on or before

January 21, 1998, these regulations shall be effective upon the

expiration of 30 days after publication in the Federal Register during

which either or both Houses of Congress are in session. Notice of the

effective date will be published in the Federal Register. If

significant adverse comment is received, the FCA will publish a notice

of withdrawal of the regulations and indicate how the Agency expects to

proceed with further rulemaking.

ADDRESSES: Comments may be submitted via electronic mail to ``reg-

[email protected]'' or facsimile transmission to (703) 734-5784. Comments

also may be mailed or delivered to Patricia W. DiMuzio, Director,

Regulation Development Division, Office of Policy Development and Risk

Control, Farm Credit Administration, 1501 Farm Credit Drive, McLean,

Virginia 22102-5090. Copies of all communications received will be

available for review by interested parties in the Office of Policy

Development and Risk Control, Farm Credit Administration.

FOR FURTHER INFORMATION CONTACT: Linda C. Sherman, Policy Analyst,

Regulation Development Division, Office of Policy Development and Risk

Control, (703) 883-4498, TDD (703) 883-4444; or Rebecca S. Orlich,

Senior Attorney, Regulatory Enforcement Division, Office of General

Counsel, (703) 883-4020, TDD (703) 883-4444.

SUPPLEMENTARY INFORMATION:

I. Background

The regulations in 12 CFR part 614--subpart G pertain to interest

rates and charges by FCS institutions. Most of the regulations in

subpart G were originally promulgated by the FCA in 1972 following

Congress' modernization and consolidation of existing farm credit law

in the Farm Credit Act of 1971. The structure of the System has changed

considerably in the past 25 years, and the regulatory relationship

between FCS institutions and the FCA has become an arm's-length

relationship. The amendments set forth below reflect those changes, as

well as the FCA's current regulatory philosophy of removing prior

approval requirements not mandated by the current Farm Credit Act of

1971, as amended (Act), and unnecessary to the safe and sound operation

of an institution. The FCA will continue to hold FCS institution boards

and management accountable for their internal operations through the

examination process. Likewise, regulatory language that merely restates

statutory provisions is eliminated.

Five sections in 12 CFR part 614--subpart G are eliminated, and the

two remaining sections are renumbered and moved to 12 CFR part 614--

subpart D. Because the changes conform existing regulations to the

statute and make only minor changes to the regulatory language, the FCA

believes the rule to be noncontroversial and anticipates no significant

adverse comment from the public.

II. Description of Amendments

1. Section 614.4270--Policy

The provisions in this section are nearly identical to provisions

in sections 1.8(b), 2.4(c), and 3.10(a) of the Act and are therefore

removed, as they are duplicative and unnecessary.

2. Section 614.4280--Interest Rates

The FCA is amending existing Sec. 614.4280, which concerns interest

rate plans and policy, to make it applicable to direct lender

associations as well as to banks. This change will clarify that the

board of directors of every System direct lender is responsible for

establishing interest rates or interest rate plans. This change is

consistent with the underwriting regulation adopted earlier this year,

Sec. 614.4150, which requires the boards of directors of both banks and

associations to adopt written policies and procedures that, at a

minimum, prescribe prudent loan pricing practices.

Although no other substantive changes are made to existing

Sec. 614.4280, the FCA makes two technical changes to the final

sentence. The first clause, which states that the board ``may not

delegate its ultimate responsibilities for setting interest rates,'' is

deleted as unnecessary. Because the boards of

[[Page 66817]]

System institutions cannot delegate their ``ultimate responsibility''

for any policy decision, the FCA believes that the deleted clause adds

nothing to the regulation. At the end of the final sentence, the FCA

has replaced the reference to ``fiscal plan and long-range financial

plan'' with the words ``operational and strategic business plan,'' to

conform with the terms used in Sec. 618.8440 and elsewhere in FCA

regulations. The revised regulation is redesignated as Sec. 614.4155.

3. Section 614.4281--Discounts and Related Fees

The FCA is deleting Sec. 614.4281, which authorizes BCs to

``discount or rediscount notes, drafts, acceptances, and other

negotiable paper at such rates as may be determined by bank management

under policies of the bank board as approved by the Farm Credit

Administration.'' The FCA has concluded that the language in

Sec. 614.4281 is not necessary to authorize BCs to engage in any of the

activities listed, as they are already authorized pursuant to section

3.7(a) of the Act. The prior approval is not required by the Act or

necessary to the safe and sound operations of the institution.

4. Section 614.4290--Interest on Past Due Loans

Section 614.4290, which allows banks and production credit

associations (PCAs) to provide for the collection of interest at a

higher rate after maturity, is deleted as unnecessary. This deletion

will not affect the ability of a System direct lender to provide for a

default interest rate in its loan documents, nor will it diminish the

rights of borrowers. Section 4.13(a)(4) of the Act, Sec. 614.4376(c) of

the regulations, and the provisions of Regulation Z (Truth-in-Lending)

require that any change in the interest rate applicable to an

individual borrower's loan be disclosed to the borrower within certain

stated periods of time. These requirements would apply to interest rate

changes after maturity and, therefore, provide sufficient protection

for individual borrowers.

5. Section 614.4300--Other Charges and Fees

The FCA is deleting Sec. 614.4300, which states that banks and

associations may impose reasonable charges or fees on members,

borrowers, or applicants in connection with loans or other services

rendered. It also provides that the fees charged by an association are

subject to bank prior approval. Regulatory authority to charge fees is

unnecessary because such authority is provided expressly in sections

1.5(6), 2.2(13), and 3.10(a) of the Act.

Consistent with the FCA Board's regulatory philosophy of repealing

regulations that prescribe needlessly detailed management and

operational practices, the FCA is deleting the requirement that banks

give prior approval to affiliated associations' fees. Bank approvals

that are appropriate to the debtor-creditor relationship of a bank and

an association may be set forth in the general financing agreement

between the institutions. Therefore, the prior approval provision is

unnecessary.

6. Section 614.4320--Production Credit Associations

The FCA is deleting Sec. 614.4320, which states that ``the rate of

interest charged by an association shall be the rate authorized by the

bank, within programs prescribed by the bank board'' and allows for

different computations of interest payments authorized under such

programs. This regulation in part restates section 2.4(c) of the Act,

which provides for PCAs to charge interest rates ``under standards

prescribed by the board of the bank'' and is thus unnecessary. The

regulatory direction on the computation of interest payments was driven

by limitations in computer accounting systems that no longer exist;

thus, it is now obsolete.

7. Section 614.4321--Differential Interest Rate Programs

Section 614.4321 describes the types of interest rate programs that

System banks and associations may adopt under policies of their boards

of directors. This section was recently updated by amending outdated

language and removing an unnecessary prior approval. See 61 FR 67186

(December 20, 1996). The FCA continues to believe that it is important

to set forth the principle of nondiscrimination among similarly

situated borrowers in setting differential interest rates. Therefore,

the language in this section is retained, and the regulation is

redesignated as Sec. 614.4160 and moved to part 614, subpart D.

III. Direct Final Rulemaking

The FCA is using a ``direct final'' procedure for this rulemaking.

In a direct final rulemaking, an agency gives notice that a rule will

become final at a specified future date unless the agency receives

significant adverse comment on the rule during the comment period

established in the rulemaking notice. Direct final rulemaking is

justified under section 553(b)(B) of the Administrative Procedure Act,

5 U.S.C. 551-59, et seq. (APA). Section 553(b)(B) is the APA's ``good

cause'' exemption for omitting notice and comment on a rule where an

agency finds ``that notice and public procedure thereon are

impracticable, unnecessary, or contrary to the public interest.''

However, rather than eliminating public comment altogether, as would be

permissible under section 553(b)(B), in a direct final rule the FCA

gives the public adequate opportunity to comment on or object to a

rule. For a full explanation of direct final rulemaking, see 62 FR

63644 (December 3, 1997).

The FCA believes that the changes to 12 CFR part 614--subpart G fit

the category of rules appropriate for direct final rulemaking. These

changes delete unnecessary approvals, remove duplicative language, and

incorporate prudent oversight standards that the FCA already applies to

all institutions. As such, the amendments are straightforward and

noncontroversial. For these reasons, the FCA does not anticipate that

there will be significant adverse comment on this rulemaking.

This rule has a 30-day comment period. If, during that period, the

FCA receives a significant adverse comment on the rule, the FCA will

withdraw the rule and may either issue another direct final rule or

promulgate the rule in proposed form. A significant adverse comment is

defined as one where the commenter explains why the rule would be

inappropriate, including challenges to the rule's underlying premise or

approach, or would be ineffective or unacceptable without a change. In

general, a significant adverse comment would raise an issue serious

enough to warrant a substantive response from the FCA in a notice-and-

comment proceeding.

If no significant adverse comment is received, the FCA will publish

its customary notice of the effective date of the rule following the

required Congressional waiting period under section 5.17(c)(1) of the

Act.

List of Subjects in 12 CFR Part 614

Agriculture, Banks, banking, Flood insurance, Foreign trade,

Reporting and recordkeeping requirements, Rural areas.

For the reasons set out in the preamble, part 614 of chapter VI,

title 12 of the Code of Federal Regulations is amended to read as

follows:

PART 614--LOAN POLICIES AND OPERATIONS

1. The authority citation for part 614 is revised to read as

follows:

Authority: 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128; secs.

1.3, 1.5, 1.6, 1.7, 1.9,

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1.10, 1.11, 2.0, 2.2, 2.3, 2.4, 2.10, 2.12, 2.13, 2.15, 3.0, 3.1,

3.3, 3.7, 3.8, 3.10, 3.20, 3.28, 4.3A, 4.12, 4.12A, 4.13, 4.13B,

4.14, 4.14A, 4.14C, 4.14D, 4.14E. 4.18, 4.18A, 4.19, 4.36, 4.37,

5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 7.7, 7.8, 7.12, 7.13, 8.0, 8.5, 8.9

of the Farm Credit Act (12 U.S.C. 2011, 2013, 2014, 2015, 2017,

2018, 2019, 2071, 2073, 2074, 2075, 2091, 2093, 2094, 2096, 2121,

2122, 2124, 2128, 2129, 2131, 2141, 2149, 2154a, 2183, 2184, 2199,

2201, 2202, 2202a, 2202c, 2202d, 2202e, 2206, 2206a, 2207, 2219a,

2219b, 2243, 2244, 2252, 2279a, 2279a-2, 2279b, 2279b-1, 2279b-2,

2279f, 2279f-1, 2279aa, 2279aa-5, 2279aa-9); sec. 413 of Pub. L.

100-233, 101 Stat. 1568, 1639.

Subpart D--General Loan Policies for Banks and Associations

2. Sections 614.4280 and 614.4321 in subpart G are redesignated as

Secs. 614.4155 and 614.4160 in subpart D, and Sec. 614.4155 is revised

to read as follows:

Sec. 614.4155 Interest rates.

Loans made by each bank and direct lender association shall bear

interest at a rate or rates as may be determined by the institution

board. The board shall set interest rates or approve individual

interest rate changes either on a case-by-case basis or pursuant to an

interest rate plan within which management may establish rates. Any

interest rate plan shall set loan-pricing policies and objectives,

provide guidance regarding the circumstances under which management may

adjust rates, and provide the upper and lower limits on management

authority. Any interest rate plan adopted shall be reviewed on a

continuing basis by the board, as well as in conjunction with its

review and approval of the institution's operational and strategic

business plan.

Subpart G--Interest Rates and Charges

Subpart G [Removed and Reserved]

3. Subpart G, consisting of Secs. 614.4270, 614.4281, 614.4290,

614.4300 and 614.4320, is removed and reserved.

Dated: December 16, 1997.

Floyd Fithian,

Secretary, Farm Credit Administration Board.

[FR Doc. 97-33260 Filed 12-19-97; 8:45 am]

BILLING CODE 6705-01-P